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The Worst Dow Stocks of 2012

Despite a positive Dow performance, four Dow stocks have remained in negative territory.

The Dow Jones Industrial Average(INDEX: ^DJI) finished 0.32% higher on Friday, wrapping up a fifth-straight week of gains for the broad index. Investors concerned about the volatility and unease building up to the November election should note that this stretch reflects the longest weekly win streak since the five-week period ended October 28, 2011. It’s been a rocky year, no doubt but, overall, the market’s shown some resilience.

Investing in a diverse portfolio of Dow stocks looks like a sound strategy thus far, but there are still a few losers who have been left behind. The chart below shows the four Dow stocks in negative territory for 2012, compared with the Dow’s gain of more than six percent. Let’s dissect their performance and understand whether these stocks can boomerang in the months to come.

Old school, big tech

For the analysts, programmers, and bloggers who obsess over the tech sector, the Dow’s tech blue chips of yesteryear are rarely on their radar. Sure, IBM(NYSE: IBM) has had a run-up in recent years, but Hewlett-Packard(NYSE: HPQ), the biggest loser of 2012 so far, remains a step-behind Big Blue in almost every facet of its business. The shift away from commoditized computers and towards high-margin services should’ve taken root much sooner, and HP’s executive leadership can’t hold a candle next to IBM’s performance under Sam Palmisano. Even with Palmisano stepping down, and a much higher price-to-earnings ratio, IBM looks poised to outperform HP for quite some time.

Another big tech laggard in 2012 has been the networking giant, Cisco(NYSE: CSCO). Similar to HP, Cisco has been going through a bit of a "restructuring" lately, a loose term thrown around whenever a stumbling tech company wants to suggest that "bold" steps will be taken to present a more nimble operation. For the most part, cost-reduction efforts, like layoffs and reshuffling of overhead, do little to drive innovation in the shadow of much stronger competitors.

A roller coaster ride

Dow components Caterpillar(NYSE: CAT) and McDonald’s (NYSE: MCD) share little in common when it comes to day-to-day operations, but their stocks have faced strikingly similar trajectories. Both companies stormed out of the gates after weathering the 2009 recession, and did not look back through the end of 2011. As 2012 introduced an uncertain economic outlook, however, the valuations on both companies looked a little pricey in the face of Europe’s struggles and China’s slowdown.

Such broad exposure to international markets can be a boon if the global economy’s clicking on all cylinders, but managing across the various economic cycles can be difficult. Emerging markets will continue to play a crucial role for both companies, and expect steady investment in countries like China, Brazil, and India. The impressive run-up might be over, but slow-growth could be on the horizon due to their respective competitive positions and strong global brand.

Even the mighty can fall

The leaders in tech, manufacturing, and the restaurant-world can rise and fall like the tide. This year has dealt a blow to these Dow stocks, but the future could look much more promising. Investors need to conduct solid research to understand what makes these companies tick. For a deeper dive, dig into one of our brand new reports. Companies like Caterpillar might be the market leader today, but investors need to be aware of the risks posed by even the bluest of blue chip stocks. Read all about Caterpillar's strengths and weaknesses by downloading our premium analyst report now.

Author

Isaac has been been a Foolish investor for 10 years. He manages client portfolios at Huckleberry Capital Management, which involves (mostly) buying and (some) selling of stocks in their accounts. When he is not hunting for companies with wide economic moats, he is chasing his toddler around the Blue Ridge Mountains.